Breathing space

Fort Lauderdale
This story is sourced from Airline Business
Subscribe today »

This year's Airline Distribution conference showed that network carriers have made large inroads into their distribution costs but much work remains for smaller carriers and in flexible sales approaches

Travis Christ, US Airways vice-president of sales & marketing, believes an end to the cost struggle between carriers and the Global Distribution Systems could be in sight. "It is possibly in the throes of being tamed," he told the audience at Airline Distribution 2007, the annual gathering of experts in this field, organised by Airline Business and corporate travel credit card provider UATP.

After a stream of constant rises during the 1990s it was the deregulation of Computer Reservation Systems (now known as GDSs) in the US that forced distribution fees to drop, said Christ. "Since deregulation our savings were very material," he noted at the event, which gathered over 200 airline and industry specialists in Ft Lauderdale, Florida in late April.

US carriers, as well as others around the globe, continue to be far from satisfied with how much they pay to sell their seats via travel agencies and the GDSs. However, there is breathing space for new business models to be worked up after a year that saw all the US majors renegotiate their GDS contracts.

Many of the new deals expire in 2011. "In the US the cycle starts over, 2011 will be here before you know it," said Christ. "Change is still coming and now is the time to prepare." The US is the only deregulated GDS market, although Europe's regulators are reviewing how and when to do the same.

The new deals in the US saw the largest carriers using the threat of withdrawing their cheapest fares from the GDSs to extract price concessions. The "nuclear option" of withdrawing content was something neither airlines nor the GDSs wanted, and carried big risks for both. As Chris DeGroot, senior director distribution strategy at American Airlines, said: "In the end everybody gained something and everyone gave something up."

The US carriers have achieved significantly lower domestic GDS fees and will now turn their attention to lowering international GDS fees. "Our absolute cost of distributing internationally is approaching our absolute cost of distributing domestically," said DeGroot, despite a smaller number of bookings.

"In the US, there probably is very good competition" between the GDSs, said Richard Clarke, director at consultancy Travel Technology Research. "Sadly, international markets are not like that. The problem is we do not have competition everywhere. The GDSs know that and the airlines know that. That's why compromises get more complicated in the international scene versus in the US."

This spring one of the industry's toughest negotiations involved British Airways as it sought to lower its GDS costs. The carrier achieved many of its savings goals and has got to a point where the fat around its distribution cost has been stripped out. "It used to cost $24-25 to distribute our product. Now it is less than $5," said Oliver King, BA's senior vice-president Latin American & the Caribbean. BA has got its distribution cost to a level where "it is difficult to see where the next big step change is going to come from". Further benefits will come from "chipping away" at the issue, he added.

While Qantas has renegotiated all of its distribution contracts at least twice, there is still plenty of work to be done, said Darren Peisley, the carrier's general manager business development. "Is the job done on distribution? Unfortunately not. We are getting our cost of sale to a point where the low hanging fruit has been taken. We've got another 3-4 years of major cost reduction here.

"We must drive to a no cost of sales on our direct channels," said Peisley. "We are about half way to achieving that objective." This means making its website the preferred place for customers to book their tickets. "We generate significantly higher yields on our direct channels compared to the online travel agents. We've got to run our website like Expedia."

Bargaining power

As carriers with large home markets and strong online sales extract concessions from the GDSs, smaller players and those in markets with low internet usage are less successful. "The bargaining power of Latin carriers is weak," noted Giancarlo Taliente, senior director of distribution at Panama's Copa Airlines. "Cheaper distribution channels are not as developed."

Taliente estimates that Latin carriers pay 22% more per booking segment than their US counterparts. With web bookings that can struggle into double-digits, these players have less leverage to influence GDS costs. However, the most active like Copa are seeking every opportunity to lower costs and are working with the Latin American Airline Association to share best practice.

Emre Serpen, senior vice-president of consultancy SH&E, said that some Latin carriers have created web portals that allow less expensive bookings for agencies. Brazil's TAM, for instance, now has 1,800 agencies signed up to use its eTAM portal, a desktop tool that allows them to book tickets directly with the carrier. Over 85% of TAM's indirect sales pass through that channel, and only 14% through the GDSs.

Serpen also suggested that call centres, which are generally considered a high-cost channel in Europe and North America, are a viable alternative in Latin America where labour costs are lower. A segment booked through a call centre still costs half of an agency booking.

One of the issues in the region is low credit card usage. As Ricardo Granillo, sales & distribution director for El Salvador's TACA, the multi-nation Central American carrier, pointed out: "Mistrust is common and widespread in the region, and many people are reluctant to make payments over the Internet."

Looking forward, there are some major strategic questions for the distribution players to answer. Firstly there is the role of the suppliers providing a cheaper alternative to the GDSs. After much launch fanfare a couple of years ago the delivery of these Global New Entrant solutions has been slow.

Christ of US Airways sees a meaningful role next time for the so-called GNEs. "Their plans were clearly a bit ahead of their time," he said. But the US airlines, some of which have invested in GNEs, "should eagerly show (the new players) the way, and do our part in assisting in their research and development. They will be back, and if they play their cards right, then next time around the airlines will have an even more powerful tool at their disposal."

Another major issue is how the GDSs themselves move forward how they invest when their traditional GDS business is under such cost pressure. Then there is the need to develop solutions for low-cost carriers. "It truly is asking a lot to move from a 1970s platform to a 21st Century platform," said Christ.

The GDSs know full well they will have to change. "We need to be more creative from a technology point of view because a lot of the low-cost carriers don't necessarily do things in the traditional industry way," said Jean Collier, senior director airline services Americas, Galileo.

What is certain is that network carriers do want to continue using the GDSs as long as it is at the right price. "We are channel agnostic," said Jeffrey Smisek, president of Continental Airlines. "GDSs bring a lot of value to the table."

Unbundled products

A host of low-cost players and some network carriers like Air Canada have moved swiftly to unbundle their product, selling the ticket at a basic price and then offering a series of choices as add-on extras like seat selection and onboard meals.

Air Canada senior vice-president of sales & distribution Marc Rosenberg explained: "What we set out to do in changing the whole revenue model was to understand what our customer wanted, design what they wanted and deliver it on the customer's terms, not our terms, and not the legacy GDS' terms." Rosenberg added that flyers "like the concept of choice. 'I am choosing, I am deciding, I like this brand', they say to themselves."

Air Canada is working with supplier ITA Software to deliver these choices as standard GDS platforms struggle to allow these features. "This is one of the things that the traditional GDS environment did not provide," said Cormac Whelan, chief executive of Datalex, an Irish IT systems provider that works with several carriers including Aer Lingus and SAS on offering such options.

Greater Fort lauderdale Convention & Visitors Bureau